The Housing Market is Running on Fumes

Throughout the pandemic, housing has been one of the stalwarts of the economy along with the sustained level of consumer spending that was made possible by massive government stimulus. Not surprisingly, we believe this led to consumer confidence remaining higher than one might have predicted under the circumstances. In the previous four recessions, for example, the Consumer Confidence index dropped below 80 but only dropped to around 90 during the pandemic. It recently spiked to 109.7!!

In the latest Conference Board survey that is used for the index, the number of respondents planning to buy a home within 6 months reached an all-time high of 8.4%. Hence the focus on housing as a critical part of economic growth. Even during normal times – if we can remember what that is like – housing is a constant focus as a gauge of economic activity because a considerable amount of capital makes its way into the economy via housing. For example, Housing and utilities are the largest component of personal consumption expenditures (PCE), while PCE makes up around 70% of total GDP. When you add residential private domestic investment, the combined contribution of housing activity to GDP is between 16% and 18%.

Housing is also important because for the majority of Americans, their primary residence is their most valuable asset. When real estate prices are increasing, people feel better about their financial situation, which drives further consumption. The recent survey therefore, is a leading indicator of a potential spike in consumer spending. So, for both fiscal and psychological reasons, the housing market is an important component of our economy.

For Q42020, housing made up 17.7% of GDP and contributed 1.24% of the 4% GDP increase. Meanwhile, the homeownership rate continued to increase through 2020 – a trend that started back in 2016, after a steady decline that was caused by the housing collapse during the Great Financial Crisis.

Is the Housing Trend Slowing?

Towards the end of 2020, however, there was a considerable drop in homeownership without a proportional decrease in total occupied housing units. This reflects the possibility that some owners may be taking advantage of a red-hot market and selling their homes with the intention of renting, either temporarily or for the long-term. Unfortunately for those consumers looking to buy, there just aren’t enough of those houses for sale right now.

Spurred by strong demand, home prices for both new and existing homes have increased at double digit rates as inventory remains low and the pandemic led social distancing lifestyle accelerated the migration from dense urban areas to less-crowded suburbs – resulting in higher demand for single-family homes.